The invention is generally related to a method of managing credit risks and reducing operational expenses associated with the sale and purchase of certain commodities. More specifically, the invention relates to a method of shortening the payable cycles for certain commodities and centralizing the payment function via electronic interfaces for standardized contractual relationships.
In the purchase and sale of certain commodities, the delivery cycle is often much shorter than the billing cycle. This results in a build-up of accounts payable related to a product which has already been delivered, and in many cases consumed. This issue can be addressed on a bilateral basis between individual counterparties by requiring parties to prepay or by operating with shorter billing cycles which match the delivery cycles as closely as possible. However, prepayments result in a capital cost to a Buyer, and shortened billing cycles result in a far greater number of financial settlements between counterparties and greatly increase overhead expenses. Accordingly, there is a need to reduce the length of the billing cycle to the shorter delivery cycle without significantly affecting the capital outlays required in prepayment and without burdening the parties with increased overhead expenses related to the billing cycles.
The market for electrical power is a prime example of the sort of transactions which are susceptible to the problems which this invention is suited to address. In the forward market a party looking to acquire power could enter into a forward contract with another party for the delivery of a certain quantity of power per day for a month, anticipating the need for power on that day and also hedging its supply of power for the time period covered by the contract. As the delivery period begins, in traditional terms either of two things would happen. Either, the Seller would have negotiated that the Buyer prepay the full value of the contract for the month's delivery, or the Seller would deliver the power each day and then bill the Buyer for the month's delivery according to the contract. Both of these approaches have their difficulties. The first is unappealing to the Buyer because prepayment requires additional capital to finance the purchase. The second is unappealing to the Seller because it would deliver a month's contract of power to the Buyer without any compensation, and any risk as to the financial stability of the Buyer would be open through the month of delivery and the ten or twenty day payment cycle. Thus the Seller has to finance the fifty day period between its first delivery of the power and its expected receipt of payment. An alternate approach where invoices would be sent out each day for the power supplied would be a bookkeeping and accounting nightmare with increased costs on both sides of the transaction in generating and transmitting bills and processing payments receipts on the Seller side and receiving, processing and paying bills on the Buyer side. Thus, an alternative approach is desired which reduces the Seller's risk of loss for nonpayment from the current forty or fifty day cycle without the need for prepayment, which merely shifts the risk and expense of financing the transaction to the Buyer's side.
The invention relates to a method of shortening the payment cycle to match the delivery cycle of delivered commodities as closely as possible, and to a method of handling payment for such deliveries through a central, standardized payment agent which tracks scheduled deliveries and payments through electronic interfaces with the Buyers and Sellers of commodities, thereby reducing capital and overhead costs. The system is applicable both in connection with contracts which are for delivery of some product over a period of time and for futures contracts for future physical delivery of some product.